Q1) Revenues generated by a new fad product are forecast as follows:

Year Revenues

1 $40,000

2 20,000

3 15,000

4 10,000

Thereafter 0

Expenses are expected to be 40% of revenues, and working capital required

in each year is expected to be 20% of revenues in the following year. The

product requires an immediate investment of $46,000 in plant and equipment.

a. What is the initial investment in the product? Remember working capital.

Initial investment =

b. If the plant and equipment are depreciated over 4 years to a salvage value

of zero using straight-line depreciation, and the firm's tax rate is 20%, what

are the project cash flows in each year? Assume the plant and equipment are

worthless at the end of 4 years. (Do not round intermediate calculations.)

Cash flow from Year 1 =

Year 2 =

Year 3 =

Year 4 =

c. If the opportunity cost of capital is 10%, what is the project's NPV? (A

negative value should be indicated by a minus sign. Do not round intermediate

calculations. Round your answer to 2 decimal places.)

NPV =

d. What is project IRR? (Do not round intermediate calculations. Enter your

answer as a percent rounded to 2 decimal places.)

IRR =

Q2) Better Mousetraps has developed a new trap. It can go into production for an

initial investment in equipment of $5.7 million. The equipment will be depreciated

straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for

$671,000. The firm believes that working capital at each date must be maintained at a

level of 10% of next year's forecast sales. The firm estimates production costs equal

to $1.80 per trap and believes that the traps can be sold for $7 each. Sales forecasts are

given in the following table. The project will come to an end in 6 years, when the trap

becomes technologically obsolete. The firm's tax bracket is 35%, and the required rate

of return on the project is 8%. Use the MACRS depreciation schedule.

Years: 0, 1, 2, 3, 4, 5, 6, Thereafter

Sales (millions of traps) 0, 0.4, 0.6, 0.7, 0.7, 0.5, 0.3, 0

a. What is project NPV? (Negative amount should be indicated by a minus sign.

Do not round intermediate calculations. Enter your answer in millions rounded

to 4 decimal places.)

NPV =

b. By how much would NPV increase if the firm depreciated its investment using the

5-year MACRS schedule? (Do not round intermediate calculations. Enter your

answer in whole dollars not in millions.)

NPV increases by =